Rev. Proc. 81-11

Section 1. Purpose

The purpose of this revenue procedure is to set forth the procedures under which partnerships with ten or fewer partners will not be subject to the penalty imposed by section 6698 of the Internal Revenue Code for the failure to file a partnership return.

Sec. 2. Background.

.01 Section 6031 of the Internal Revenue Code provides that every partnership shall make a return for each taxable year, including all information that the Secretary of the Treasury may by forms and regulations prescribe.

.02 Section 6698 of the Code imposes a penalty if any partnership required to file a return under section 6031 fails to file a timely return or files a return that fails to show the information required by that section, unless the failure is due to reasonable cause.

.03 The Conference Committee Report concerning section 6698 of the Code states:

The penalty will not be imposed if the partnership can show reasonable cause for failure to file a complete or timely return. Smaller partnerships (those with 10 or fewer partners) will not be subject to the penalty under this reasonable cause test so long as each partner fully reports his share of the income, deductions, and credits of the partnership. . . .

H.R. Rep. No. 95-1800 (Conf. Report), 95th Cong., 2d Sess. 221 (1978), 1978-3 C.B. (Vol. 1) 521, 555. See also H.R. Rep. No. 95-1445, 95th Cong., 2d Sess. 75 (1978), 1978-3 C.B. (Vol. 1) 181, 249, and S. Rep. No. 95-1263, 95th Cong., 2d Sess. 106 (1978), 1978-3 C.B. (Vol. 1) 315, 404, which contain similar statements.

.04 The committee reports indicate that Congressional intent was not to impose additional filing requirements on existing small partnerships of the type that historically had not filed partnership returns, e.g. a small family farm partnership, a small, family-owned retail store partnership, or, in some cases, coownership of property.

Sec. 3. Required Procedures

.01 A partnership composed of ten or fewer partners of a type that has not historically filed a partnership return, such as a family farm partnership, a family-owned retail store partnership, or, in some cases, co-ownerships of property will be considered to have met the reasonable cause test and will not be subject to the penalty imposed by section 6698 of the Code for the failure to file a partnership return, provided that the partnership or any of the partners establishes, if so requested by the Service, that all partners have fully reported their shares of the income, deductions, and credits of the partnership on their timely-filed income tax returns.

.02 For purposes of section 3.01, a partnership will not be considered to be of a type that has not historically filed a partnership return unless it is a domestic partnership composed entirely of noncorporate general partners. Required to file partnership returns are partnerships with significant financial holdings, tier partnerships, and partnerships where each partner's interests in the capital and profits are not owned in the same proportion or where all items of income, deductions, and credit are not allocated in proportion to such pro rata interests.

.03 Although a partnership of ten or fewer partners may not be automatically excepted from the penalty imposed by section 6698 of the Code under paragraph .01 above, the partnership may show other reasonable cause for failure to file a timely partnership return.

.04 In determining whether a partner has fully reported the partner's share of the income, deductions, and credits of the partnership, for purposes of paragraph .01 above, all the relevant facts and circumstances will be taken into account. In making this determination, the nature and materiality of any error or omission will be considered. For example, although an isolated clerical error normally reflects no more than mere inadvertence, such an error may be of such magnitude that the partner will not be considered to have fully reported. If the error or omission results in a de minimis understatement of the net amount payable with respect to any income tax, the penalty will not be asserted. However, if the error or omission results in a material understatement of the net amount payable with respect to any income tax, the partner generally will not be considered to have fully reported and the penalty will be applied.